We are writing to comment on proposed Rule 204-3(d) and proposed
Instruction 3 to Part 2A of the new Form ADV proposed in Investment
Advisers Act Release No. 1862 (April 5, 2000) (the "Release"). This portion
of the Commission's proposal would require registered investment advisers
to treat investors in certain unregistered investment funds as clients so
as to be obligated to deliver to such investors a proposed plain English
narrative brochure and supplements thereto. While we heartily concur with
the Commission's overall objective of making the brochure requirement more
effective and more readable, we believe it is not necessary or appropriate
in the public interest or for the protection of investors to impose a
separate brochure delivery requirement for investors in private funds.
Further, since investors in these types of investment funds should not be
viewed as clients of the investment advisers for any purpose under the
Investment Advisers Act, we believe that any disclosure requirement the
Commission determines is appropriate should be grounded on a different
rationale. A new Rule under Section 206(4) could, for example, state simply
that any offering materials furnished to investors in a fund should reflect
the information about the adviser and its relationship to the fund that is
material to investors.

Registered Advisers Should not be Required to Provide a Separate
Brochure to Investors in Funds Managed by Them.

In the Release the Commission identifies several flaws in the
existing client disclosure regime that its brochure proposal is designed to
address (text after note 107). These flaws include primarily various ways
in which the information provided is either overly broad or not
sufficiently geared to the client's situation. However, by imposing a
separate brochure delivery requirement to investors in private funds, the
Commission would, we believe, be compounding these problems for such
investors.

Most of the information in a typical investment adviser's general
brochure would not be relevant to a prospective or current investor in a
private fund managed by the adviser. A prospective investor in a risk
arbitrage fund would, for example, have no interest in the various types of
advice the adviser provides to its clients or how the adviser tailors
advice for its clients, the adviser's wrap fee programs, its fee schedule,
the types of clients the adviser markets to, how accounts are reviewed and
so forth. In addition, several mandated disclosures are inappropriate for
investment funds. For example, it is not true that investors will incur
brokerage fees, that an investor may obtain a refund if it redeems its
investment, that an investor can purchase products (i.e., the fund)
recommended by the adviser through other brokers or that an investor may
place any limitation on the fund's investments.

Conversely, most of the information about an adviser that is
potentially material to an investor in a particular private fund managed by
that adviser is already being provided to investors through the fund's
offering materials. Private funds that are offered to any unaccredited
investors must provide disclosure comparable to the analog Commission form,
which would generally be Form N-2 under the Investment Company Act of 1940.
See Rule 502(b)(2)(A) under the Securities Act of 1933. Form N-2 requires
disclosure of everything the Commission believes is pertinent to investors
in a closed-end fund about the adviser and its practices with respect to
the fund. Although private funds marketed solely to accredited investors
are not obligated to provide any particular form of disclosure to potential
investors, it is the uniform practice in the industry to provide an
offering document (except occasionally in offerings to a very limited
number of highly sophisticated investors who are actively negotiating the
terms of the fund with the adviser). These offering documents, because of
Rule 10b-5 concerns and with reference to Rule 502(b)(2)(A) under the
Securities Act, provide disclosure regarding the adviser and its practices
that in most cases actually goes beyond what would be required by Form N-2.
These offering documents typically provide detailed information about the
team that will manage the fund, the fund's investment practices and
techniques, risk factors, portfolio execution practices, soft dollar
practices, the circumstances in which agency cross, principal co-investment
and other potential conflict transactions may occur, costs and expenses and
fees and pertinent performance information.

The Commission is not yet formally required by Section 225 of the
Graham-Leach-Bliley Act (to be codified as Section 202(c) of the
Investment Advisers Act) to consider whether its proposed brochure
requirement will promote efficiency, competition and capital formation.
However, we believe that the Commission should currently consider these
values in its rulemaking activities since they are explicitly stated in the
legislation as additional aspects of the existing public interest standard
rather than a new or different standard. If the Commission does so, we
believe that it will find the application of the brochure requirements to
investors in private funds to be unsupportable because such a requirement
will promote inefficiency, make it more difficult for registered investment
advisers who manage private funds to compete and impede the capital
formation process.

Given the substantial compliance with the pertinent and material
aspects of the proposed brochure requirement in private fund offering
materials, requiring delivery of a separate brochure to investors in
private funds would be an inefficient use of time and resources. Many
registered investment advisers manage several private funds, many of which,
under Section 3(c)(7) of the Investment Company Act of 1940, have hundreds
of investors. A separate brochure delivery requirement would force them to
deliver thousands of copies of largely irrelevant or duplicative
information at substantial expense.

Requiring delivery of a separate brochure to investors in private
funds would also be anticompetitive in relation to the requirements that
would apply to registered funds and to private funds managed by
unregistered advisers. There is no difference between registered funds and
private funds that we are aware of that would justify treating them
differently in this regard. While most registered funds have a board of
directors or the equivalent that presumably can question and monitor the
adviser's practices, many private funds organized as limited liability
companies or business trusts also have boards and many private funds have
advisory boards on which major investors often have representation.
Further, investors in private funds have the right to obtain additional
information regarding the adviser and historically have exercised their
bargaining power to at least the same extent as have the boards of
directors of registered funds. More importantly, registered and
unregistered funds have the same materiality standard regarding disclosure
to investors in their offering materials. A board of directors cannot serve
to reduce the level of information about the adviser that is material to
investors. Since the same standard applies, investors in either type of
fund should receive the pertinent information whether or not the fund has a
board of directors. Finally, under Section 206(4) of the Investment
Advisers Act, which is one of the bases for the brochure delivery
requirement (See Part VI of the Release), there is no difference between
unregistered funds managed by registered advisers and unregistered funds
managed by unregistered advisers. The Commission's rulemaking efforts
should treat these two classes of advisers in the same manner for these
purposes.

We believe that investors in private funds generally receive
appropriate information regarding the funds' advisers and their practices.
We are not aware that the Commission has found to the contrary and we
question whether it is appropriate to impose additional regulatory burdens
if none are needed. If after further review the Commission nonetheless
determines that additional regulation is necessary and appropriate in the
public interest, we respectfully submit that the proposed "clarification"
that brochure delivery requirements apply to investors in private funds
(text at note 117 of the Release) is not an appropriate solution and that a
more appropriate solution is readily available. As to the Commission's
proposed "clarification," we believe that there is no basis for concluding
that investors in private funds are clients of an adviser for any purpose
if they do not receive advice based on their individual situations and that
the Commission should instead take the opportunity to clarify that such
investors are not clients, thereby clearing up confusion in this area. We
discuss this matter in detail in the following section. As to an
appropriate method of assuring that investors receive appropriate
information about the advisers of their funds, we would suggest that any
action by the Commission be through a Rule under Section 206(4) of the
Investment Advisers Act that would state simply that it would be
fraudulent, deceptive or manipulative if any offering materials furnished
to prospective investors in any investment fund client with respect to
which an investment adviser has discretionary authority do not reflect the
information about the investment adviser and its related persons and their
relationships with the fund that would be material to such prospective
investors.

By applying to all investment advisers, whether registered or not,
such a Rule would be even-handed in its application. By focusing on the
information that is material to prospective investors in a particular fund,
it would avoid the necessity of providing extraneous information. By
requiring that the information be in the offering materials, it would avoid
unnecessary duplication and parallel the disclosure regime for registered
funds.

The Commission's proposed revision to Rule 204-3 would technically
apply only to registered advisers that also serve as a general partner,
managing member or trustee of a limited partnership, limited liability
company or trust. This formulation would apparently not apply the brochure
delivery requirement if an affiliate of the investment adviser were the
general partner, manager or trustee and the adviser acted by contract to
provide investment advice only or if the advisee were a corporation. On the
other hand, the Commission's formulation could apply to persons acting as
trustees of finance subsidiaries and asset backed finance companies, which
are often organized as trusts or limited liability companies. By applying
to all investment advisers but only where they exercise discretion with
respect to an investment fund, our suggested alternative would provide
coverage that would be more evenly applicable to the world of unregistered
funds. Once again, however, we do not mean to suggest that any additional
regulation is required, only that there are preferable alternatives if the
Commission ultimately determines further regulation is appropriate.

As a separate note, we would urge the Commission to revise its
reference in general instruction 2 to Part 2A of the ADV to electronic
delivery requirements to include the most recent release on this subject
(SEC Rel No. 33-7856 (4/28/00)). This would make it clearer than does the
1996 release cited in the proposal that an adviser may make delivery by
posting its brochure on its website with appropriate disclosure in the
advisory contract or marketing material reflecting the website location and
the availability of the brochure.

Investors in a Private Fund are not Clients of the Fund's Investment
Adviser

In the Release (text at note 117) the Commission appears to take the
position that investors in a private fund are clients of the fund's
investment adviser for purposes of Rule 204-3's brochure delivery
requirement. In note 117 the Commission explains its understanding that a
contrary position has been taken by some advisers based on Rule
203(b)(3)-1(a)(2)'s provision that only the fund is the client for purposes
of determining whether the adviser has the minimum number of clients
necessary to mandate registration. The Commission goes on to state that
this conclusion would result in no brochure being delivered, which would
undermine the remedial purposes of the Investment Advisers Act and
concludes by citing Abrahamson v. Fleschner, 568 F.2d 862 (2d Cir. 1977)
("Abrahamson"), for the proposition that the anti-fraud provisions of the
Investment Advisers Act apply to investors in private funds.

We believe, contrary to the Commission's statements, that (1)
advisers do not deliver brochures to investors in their private funds
because such investors are not clients under the Investment Advisers Act
without regard to Rule 203(b)(3)-1(a)(2); (2) as discussed above, it is not
necessary to turn investors into clients to have them obtain the
information about the fund's adviser that is pertinent to their investment
decision; (3) turning investors into clients would lead to numerous
significant problems under the Investment Advisers Act which would
inevitably be used by the plaintiffs' bar to prove violations by the
advisers of registered investment companies as well since there is no
rational basis for making private investors clients without also making
public investors clients; and (4) the Abrahamson case was wrongly decided
and should have no precedential bearing.

1. Investors are not Clients. The Investment Advisers Act defines an
investment adviser as any person who (i) for compensation, engages in the
business of advising others, either directly or through publications or
writings, as to the value of securities or as to the advisability of
investing in, purchasing or selling securities or (ii) who, for
compensation and as part of a regular business, issues or promulgates
analyses or reports concerning securities. The Act does not define the term
"client;" however, such term plainly has a correlative meaning as the
recipient of the investment advice. Although it may fairly be concluded
that a private investment fund is the recipient of investment advice from
its investment adviser, such advice is not provided in any manner to those
who invest in the fund. They are, like shareholders of registered mutual
funds, simply passive holders of a security that entitles them to their pro
rata economic share, along with all the other investors, of the benefits or
detriments resulting from the advice provided by the investment adviser to
the fund. In this regard it does not matter whether there are 50 investors,
5,000 investors or 500,000 investors. None of them receive any advice from
the adviser and all of them share pro rata in the benefits and detriments
of the advice the adviser provides to the fund. There are privately offered
unregistered funds organized as partnerships, limited liability companies
and business trusts with hundreds of equity investors and there are
privately offered registered funds organized in precisely the same forms
with fewer than 50 equity investors. There does not appear to be any basis
on which to conclude that investors in the private fund are clients while
investors in the registered fund are not. The only potential difference
between the two funds aside from registration is that, in some cases, the
unregistered fund will not have a board of directors whereas the registered
fund will in all cases. However, the presence or absence of a board of
directors has no bearing on whether investment advice is being provided to
the investors. Abrahamson, the only decision, whether judicial or
administrative, that appears to find that investors are clients, did not
base its finding on either of these differences-without-meaning. Rather,
the Abrahamson court appears to have based its conclusion on the fact that
the adviser received compensation and that reports were provided on which
investors must have relied in deciding whether to maintain their investment
in the fund. Not only does this fail to provide a basis for treating
investors in private funds differently from investors in registered funds,
it also fails to establish any of the elements of an advisory relationship.

The Abrahamson court was apparently trying to seize on the element of
the definition of investment adviser referring to the promulgation of
analyses or reports concerning securities for compensation as part of a
regular business. However, a report stating that the fund held specific
amounts of specific securities on a specific date or, as in the Abrahamson
case, a report comparing fund performance to an index cannot rationally be
viewed as "analyses or reports concerning securities" within the meaning of
the Act. First of all, such reports are properly regarded as reports by the
fund, not the adviser, that are part of the duty of any entity to report to
its owners. Second, the statutory phrase "analyses or reports concerning
securities" implies that some assistance or advice regarding the
recipient's potential investment decisions about third party securities is
intended, whereas the typical portfolio report focuses solely on the merits
of the issuer's securities that the investor has already purchased.
In this regard such a report is no different than the annual and quarterly
reports by management of an industrial company. Such managers also receive
compensation, also provide reports to investors about the company's
securities and also expect that investors will rely on those reports. Yet
such reports are properly not considered "analyses and reports concerning
securities" under the Advisers Act. The reports by registered and
unregistered investment companies are no different. To date, no one has
suggested that the periodic reports to shareholders of registered mutual
funds are "analyses or reports concerning securities" by the funds'
advisers for compensation within the meaning of the Investment Advisers
Act. However, that would be the ineluctable and very problematic conclusion
that would have to be drawn from the Commission's proposal since there is
no other basis for finding a client relationship and no basis on which to
distinguish registered from unregistered funds.

2. It is not Necessary to Treat Investors as Clients

As discussed in the first part of this comment letter, investors in
private funds are adequately served at present by the offering materials
that are and always have been the appropriate mode of disclosure to
investors under the federal securities laws. If the Commission should
decide that they are not adequately served, there are (as discussed
earlier) adequate tools ready at hand to satisfy the Investment Advisers
Act's remedial purposes without turning investors into clients.

In addition, there are numerous other laws in place to protect
investors in private funds. For example, Regulation D under the Securities
Act mandates disclosure requirements that apply with respect to
non-accredited investors, as discussed above. In addition, the Exchange Act
contains broker-dealer registration requirements which apply to the
offering and sale of interests in private funds by intermediaries, and the
NASD rules regulate suitability and impose fair dealing standards for these
intermediaries. Further, the Investment Advisers Act anti-fraud provisions
apply to managers of funds, whether the managers are registered or not. In
addition, general partners of private funds owe state law fiduciary duties
to their limited partners and state law also provides for derivative
actions. Either of these state law bases would have provided an adequate
remedy for the plaintiffs in Abrahamson without requiring the court to
stretch the meaning of client into meaninglessness. It is also important to
note that investors in private funds are almost entirely accredited
investors, qualified purchasers under Section 2(a)(51) of the Investment
Company Act or qualified institutional buyers under Rule 144A of the
Securities Act, who do not need the same level of protection as
unaccredited retail investors in registered funds .

3. Client Status Would Cause Numerous Problems

Providing investors in private funds with the status of clients has
numerous inappropriate corollary effects. Among them, funds (whether
private or registered) would no longer be able to engage in agency cross
transactions without getting the approval of each and every investor in the
fund and revocation of approval by a single investor would void the
approval granted by all other investors. The Staff has never taken this
position in the examination process; rather, it has required disclosure to
investors and the ability of a majority of investors to terminate blanket
authority. A contrary view would disregard the difference between a fund
and individual clients. Similarly, a fund could not engage in principal
transactions without the consent of each investor, whereas the Staff's
position in examinations and in the interpretive release discussing what
constitutes valid consent (SEC Rel. No. IA- 1732, 7/17/98) has been to
permit authorization either by a majority of investors or by an independent
third party appointed for that purpose. The Commission's orders under
Section 17(a) permitting funds to acquire money market securities from
affiliated dealers would, for example, be insufficient since they were not
granted under the Investment Advisers Act and the affiliates never obtained
consent from the millions of "clients"invested in their mutual funds.

Another undesirable effect of treating investors as clients is that a
third party would need to have a cash solicitation agreement with the
adviser rather than be a registered broker-dealer in order to receive
compensation from a registered adviser in connection with effectuating
sales of interests in a registered or unregistered fund. There are in fact
a series of no-action letters that suggest such a result. See, e.g., Stein,
Roe & Farnham (6/29/90) and Dechert Price & Rhoads (12/4/90). However,
these letters logically would require advisers and third party registered
broker-dealers to comply with the cash solicitation rule requirements with
respect to many of the popular mutual fund "no transaction fee" programs,
which would impose an immense and unwarranted compliance burden on the
mutual fund industry. Furthermore, these letters have led many purveyors of
private funds and -- we have been informed -- registered funds to conclude
that they are not required to register as broker-dealers in order to
receive such compensation if they utilize cash solicitation agreements.

In the Stein, Roe letter, for example, the Staff stated the
definition of "solicitor" (any person who, directly or indirectly, solicits
any client for, or refers any client to, an investment adviser) and then
concluded that a third party registered adviser that invested its clients'
funds in a mutual fund and received compensation from the mutual fund's
investment adviser for doing so would be indirectly soliciting clients for
the mutual fund adviser. The only reason given by the staff for this
conclusion was that, as shareholders of a mutual fund, the third party
adviser's clients would be subject to the advisory fee charged by the
mutual fund adviser to the mutual fund and therefore would be indirect
clients of the mutual fund adviser.

This analysis is flawed in several respects. First of all, the
definition of solicitor does not cover "indirect clients" but only
"indirect solicitation" of actual clients. Indeed, the concept of an
indirect client does not appear anywhere in the Investment Advisers Act, as
the definition of "investment adviser" makes clear. Second, the suggestion
that the payment of an advisory fee by a fund for advice to the fund is
sufficient to make an investor in that fund an actual client of the adviser
ignores the plain words of the definition of an investment adviser. Third,
the only other basis for finding a client relationship, which the Staff did
not assert, would be the furnishing of reports as asserted by the
Abrahamson court, which is also plainly incorrect. Finally, broker-dealer
registration would be adequate to provide suggested disclosures.

In Dechert Price the Staff backed off from its legal argument, saying
only that, while the cash solicitation rule might not explicitly apply to
the situation in the Stein, Roe letter, that situation raised the same
potential for abuse that the cash solicitation rule was designed to prevent
and with respect to which the Staff accordingly was unwilling to grant
no-action relief. We agree that investment advisers who invest their
clients' funds in mutual funds should disclose to those clients any sources
of compensation they receive from third parties in connection with or as a
result of their decision. However, this would appear to us to be a
requirement under Section 206 without regard to the cash solicitation rule,
which is a much blunter tool designed for a different purpose. It would be
preferable for the Staff to state that it would not grant no-action relief
in these types of circumstances unless proper disclosure was provided to
the clients rather than to impose all of the paraphernalia of the cash
solicitation rule (separate agreements, deliveries of brochures and written
acknowledgments) designed for the traditional solicitation of an advisory
relationship. The Staff has, in fact, often taken this sort of more finely
tuned position in recent years. See, e.g., Charles Schwab & Co. Inc.
(8/6/92) (payments by advisers or distributors in no transaction fee
context) and Merrill Lynch Asset Management (4/28/97) (implementation of
safeguards of private placements to affiliated mutual funds). At the same
time the Staff should take the opportunity to clarify that the receipt of
compensation from third parties for effectuating sales of securities (such
as mutual funds and private funds) satisfies the definition of broker in
the Securities Exchange Act of 1934 and that persons engaging in such
activities as part of a business must register as a broker.

4. Abrahamson was Wrongly Decided

Abrahamson, the only case suggesting that private fund investors are
clients, is plainly wrong. Its primary holding was overruled by the Supreme
Court and it has never been cited by any court for the proposition that
investors are clients. In Abrahamson, the plaintiffs, who were limited
partners in an investment partnership, brought claims for damages against
the general partner, alleging losses resulting from fraud on the part of
defendants. One of the plaintiffs' claims was based on the antifraud
provision of Section 206 of the Investment Advisers Act. In order to
consider that claim, the court needed to find, among other things, that the
plaintiffs were entitled to invoke Section 206 and that there is an implied
private right of action for damages under the Investment Advisers Act. The
court made both findings and ultimately held that plaintiffs had alleged
compensable damages under Section 206 of the Advisers Act. Two years later,
in Transamerica Mortgage Advisors, Inc. et al v. Lewis, the Supreme Court
overruled the decision in Abrahamson with regard to the implied private
right of action under Section 206. 444 U.S. 11 (Nov. 13, 1979). The court's
other finding, that the investors were partners, is equally suspect.

Although the Abrahamson court explicitly recognized that the
plaintiffs were only entitled to protection under Section 206 if they were
clients of the investment adviser (id. at 878) and therefore the court
necessarily found that they were clients, the court barely discusses what
it was that made them clients. It would appear that the court simply
disregarded the existence of the partnership, for it states in the course
of deciding a different point, that the general partner was an investment
adviser, (1) that the general partner received substantial compensation for
managing the limited partners' investments, (2) that it provided monthly
reports to the limited partners consisting of a brief comparison of
performance to the S&P 500 index and a statement of the partnership's
investment policy and (3) that limited partners necessarily relied heavily
on these reports in determining whether to redeem their interests. The
court's first statement is inaccurate since the general partner received
compensation solely from the partnership and solely for managing the
partnership's assets. The second statement is likely to be equally wrong
since the reports were undoubtedly furnished on behalf of the partnership.
The third statement, while correct, has no bearing on whether the investors
were clients of the adviser rather than investors in a partnership.

This distinction that the Abrahamson court failed to draw is actually
of critical importance. Each of the court's three statements could be made
with equal force -- in fact would have to be made with equal force -- in
respect of every registered mutual fund. Although the Transamerica court
eliminated private causes of actions for damages under the Investment
Advisers Act, it left standing the remedy of rescission. Application of a
rescission remedy for violations of the Investment Advisers Act by the
advisers of registered mutual funds would lead to potentially large amounts
of class action litigation against such advisers. We believe that the
Abrahamson court's "analysis" has not been applied to registered mutual
funds only because, as discussed earlier, such "analysis" is completely
wrong. We would urge the Commission not to resurrect a wrongly decided case
that has never been cited favorably by any court for the proposition in
question. In that regard we would also note that the Commission itself in
its two amicus curiae briefs in the Abrahamson litigation (February 2, 1976
and May 19, 1977) went no further than to argue that the general partner
was an investment adviser and was careful not to argue that investors in
the partnership were clients of the general partner.

In summary, a determination that an investor in a fund is a client
would necessarily apply to any entity, including registered mutual funds,
and is not an appropriate or helpful approach under the Investment Advisers
Act to address the concerns of the Commission. Consequently, we would urge
the Commission either to take no action or to adopt the equally effective
and far less problematic disclosure requirements suggested in this letter.

Thank you for considering our comments. If you have any questions
please do not hesitate to call Yaffa R. Cheslow at (212) 735-3902, Philip
H. Harris at (212) 735-3805 or myself at (212) 735-2790.